Europe deals royal flush to fintechs
Corporates should not miss out on open banking benefits
IT was a quiet revolution that swept Europe on January 13, the day on which the Second Payment Directive (PSD2) became effective. While question marks remain over some of its technicalities, the new law promises to change transaction banking for consumers and corporate customers like few other pieces of regulations. The framework is also a rare example of a piece of regulation that removes barriers rather than adding red tape.
PSD2, passed by the European Council in 2015, brings both immediate and long-term benefits to consumers and corporates. For one, banks are now required to credit non-Euro payments to the payee on the same business date of receipt of funds. For Asian buyers, this means payment terms with European suppliers could be extended by a few days without negatively impacting relationships.
The much more disruptive element of PSD2 will take longer to materialize. Articles 66 and 67 compel banks to give competitors access to their customers’ account details – as long as customers agree to this information being shared. The framework goes further in that it gives third party providers the power to initiate payments on behalf of customers via the bank’s mainframe system. Banks will need to be compliant with this provision of PSD2 in mid 2019.
Although open access to sensitive bank account details might sound like the number one item on any fraudster’s Christmas wish list, the potential benefits of such access should dispel initial hesitation. The requirement for banks to create an open application programming interface (API) is designed to introduce competition in the market from fintech companies, including third party payment providers, also known as PIPSs. Consultancy Roland Berger expects this requirement will open up one billion bank accounts to new digital services in Europe alone.
And while many of these accounts belong to individuals, there is nothing to stop corporates from drawing on fintech providers to process cross-border payments. Fintechs such as Traxpay and Taulia are promising to credit payments in real time. Established players such as American Express and Western Union are making similar advances with bespoke corporate offerings that focus on slashing costs of FX transfers.
“Current banking operating models are largely closed, whereby banks own the customer interface, through which they offer their own products,” a recent Deloitte report sums up. “These interfaces are highly integrated with the services offered, which range from current accounts to savings accounts, borrowing and protection products. Fintechs and challengers have already begun to unpick this model at the edges, with new players entering niches (such as TransferWise in the payments space).”
“APIs represent fundamental shifts in IT — in how data is provided and used, how functionalities are developed and deployed, and what level of control customers have,” says Michael Araneta, AVP, IDC Financial Insights Asia/Pacific. “This presents a massive shift in how the existing IT architecture can be made ready and customizable to accommodate the changing requirement without losing control over data.”
Hong Kong misses the point
The frequently cited benefits of open banking that PSD2 enables apply to corporate banking just as much as retail banking, despite the greater focus on the latter by most analysts. Cross border payments are just the beginning. Indeed, open banking promises a suite of possibilities designed exclusively for corporates.
German fintech TrustBills, which matches corporates willing to sell their trade receivables with yield starved institutional investors, is a case in point. Using the API of its corporate customers’ banks, it could automatically detect when buyers make payment on trade receivables that have been assigned to a third party institutional investor. The funds could then be automatically re-routed to the buyer of the receivable, without manual input. The buyer is never made aware of the fact that the seller has sold its receivable – an important consideration in relationship management.
With the prospects for innovative payments and funding solutions taking shape rapidly in Europe, consumers and corporates in Asia welcome central bank initiatives in the region’s financial hubs toward the same end. Singapore’s MAS launched a consultation paper in November of last year that explored the concept; Hong Kong’s HKMA followed suit with a consultation on the same topic in January.
“By formulating an Open API framework, we aim to facilitate the development and wider adoption of Open API by the banking sector, thereby maintaining its competitiveness and improving financial services for better consumer experience through collaboration between banks and tech firms,” deputy chief executive of the HKMA Howard Lee said on the launch date of the paper.
Indeed, Open API is one of seven smart banking initiatives that the HKMA unveiled in September 2017, but critics have dismissed the progress so far as insufficient and missing the main point: to introduce competition.
“The HKMA’s Open API framework is a broken set of vague objectives and inadequate standards,” comment Bastien Douglas and Scott Edmunds, directors of Open Data Hong Kong. “Despite opening up consultation mid January 2018, the original target date to ‘finalise the policy on Open API’ was ‘by the end of 2017’ so it’s unclear if this goal-post is being delayed or not or how serious the HKMA really is for this consultation.”
So far, they charge, the HKMA has failed to “adopt legislation that forces banks to participate and cooperate (and compete). As spelled out in the HKMA consultation, the intended benefits and goals are disconnected from the mechanisms to get us there. Banks are left to voluntarily adopt their own standards – which are not standards at all – on their own timelines and roadmaps.”
A client briefing by Hogan Lovells observes in a similar vein that the HKMA’s initial efforts are focused on “quick wins which are largely within the four walls of the banks and so understood to involve less risk and, correspondingly, less need for the development of new industry standards or additional regulatory oversight”. “It is also clear that the Open API programme will be limited to Hong Kong retail banks in the first instance,” the analysis continues. “There is far less clarity in relation to the more ambitious aspects of Open API, in particular access to bank APIs and customer data by TSPs.”
Banks on the back foot
In 2015, BBVA’s executive chairman Francisco Gonzales offered a grim prediction to his peers, forecasting that more than half of banking institutions globally would fall victim to the digitization wave. If he is proven right, PSD2 will have played a crucial role.
Already, experts agree that open interfaces to customer data will disrupt not only transaction banking but higher margin products as well. “For the consumer, open banking APIs would mean visibility of bank-related information at one place, accessibility to personalized financial products and services without compromising security, and competitive and lower charges such as reduced charges on card payments and better rates on loan/credit products,” says Anuj Agrawal, senior research manager, IDC Financial Insights Asia/Pacific.
Neil Tomlinson, head of UK Banking at Deloitte, adds that while the threats to incumbent banks are greater than ever, so are the opportunities. “Incumbent banks that embrace open banking to create new sources of revenue and new propositions may enjoy a significant advantage, given their access to existing customers, strong brands and expertise. As a result, incumbent banks have a real opportunity to win the battle for the customer interface and, therefore, the customer relationship,” he says.
In their latest World Payment Report, Capgemini and BNP Paribas outline a number of avenues for banks to monetize opportunities from PSD2 and the wider open banking trends. Banks could, for instance, charge fintechs on a transaction basis each time these third parties access the APIs. Or they could charge subscriptions on a monthly or annual basis. The most drastic model, the report proposes, would be for fintechs to share a fixed percentage of their profits with incumbent banks in return for the access granted to them.
Open banking initiatives in Europe aim to disrupt an industry that exhibits some of the lowest supplier turnover rates – consumers are more than three times as likely to change their providers of car insurance and electricity than mortgage and current account providers. In Hong Kong, on the other hand, the approach has been much more timid to date, focusing on low hanging fruits only. Delaying the forceful opening of the industry further may cost the city more than losing a few banks on the way.